SOLUTIONS TO CASES CASE 5-1 Ahmad Babtein 200901416

JOHN AMOS CORPORATION INCOME STATEMENT Sales $850,000 Dividends 32,300 Gain on recovery of insurance proceeds from earthquake loss (extraordinary) 38,500 920,800 Less: Selling expenses $101,100 Cost of good sold 510,000 Advertising expense 13,700 Loss on obsolescence of inventories 34,000 Loss on discontinued operations 48,600 Administrative expense 73,400 Income before income tax 140,000 Income tax 56,000 Net income $ 84,000

The deficiencies of John Amos Corporation income statement are as follows: 1. The heading is inappropriate. The heading should include the name of the company and the period of time for which the income statement is presented. 2. Gain on recovery of insurance proceeds should be classified as an extraordinary item in a separate section of the income statement. 3. Cost of goods sold is usually listed as the first expense, followed by selling, administrative, and other expenses. 4. Advertising expense is a selling expense and should usually be classified as such, unless this expense is unusually different from previous periods.

The deficiencies of John Amos Corporation income statement are as follows: 5. Loss on obsolescence of inventories might be classified as an unusual item and separately disclosed if it is unusual or infrequent but not both. 6. Loss on discontinued operations requires a separate classification after income from continuing operations and before presentation of income before extraordinary items. 7. Intraperiod income tax allocation is required to relate income tax expense to income from continuing operations, loss on discontinued operations, and the extraordinary item. 8. Per share data is a required presentation for income from continuing operations, discontinued operations, income before extraordinary item, extraordinary item, and net income.

Thank you